Image by robertodevido via FlickrOn the day that President Obama took his oath of office, America was 10 $Trillion in debt. By the end of this year (2009) U.S. debt will surpass 13 $Trillion. By 2017 (8 years out) that debt will surpass 23$Trillion if nothing changes! How did this happen? How will this affect your Retirefund? How can America cope with this huge debt load? What effect will this have on the U.S. dollar?
The trail down this slippery slope of deficits and debt began over 8 years ago. On the day he took the Oath of office, George W. Bush (Bush 2) inherited a "national surplus" from President Bill Clinton. It was the first U.S. surplus in 30 years! Bush 2 campaigned on a promise to cut taxes and reduce Government. Dubya had been there when his father, George Herbert Walker Bush (Bush 1) spoke those now infamous words about not increasing taxes "Read my lips, no tax increases"! He was also there when his father famously recanted on that promise and set in motion substantial tax increases to help pay for the first Iraq War (operation Desert Storm). That controversy probably lost Bush 1 the election to President Clinton and it might be said that it was burned into the consciousness of Bush 2.
After George W. bush took office, he introduced the largest tax reduction in United States History. He and other Republicans looked back fondly at the Reagan years of Reaganomics ie: "lower taxes, reduced Government" which many people believe to this day was Reagan's legacy. However President Reagan was a pragmatist and when recession hit and deficits followed, he went on air to explain to the American people that he was not about to let his grand children pay for his debts and promptly raised taxes in a number of areas. Many of today's Republican politicians like to forget that simple fact, but every President in history acted when the unpopular decision to raise taxes had to be made to reduce the national debt, and they reluctantly did so, knowing full well that American voters want lower taxes, more medical benefits, more social security and high pensions but do not want to pay for them. Sometimes they paid the price at the polls, like Bush 1 did.
Bush 2 was having none of that. He did not make decisions based on fiscal responsibility, but on political expediency. He simply did what he thought the voters would reward him for. Immediately upon taking office, he announced the largest tax cut in American history, albeit, cuts that would benefit mostly rich Americans. When 9/11 hit and America declared it's "war on terror" (actually it is a war on "terrorism not terror", but that's for language critics to debate)President Bush directed U.S. Forces into Afghanistan to route out Al-Queda but at the same time, he and the hawks in his administration looked for a reason to attack Iraq, a country that had nothing to do with 9/11. We all know how that worked out don't we, but I digress. My point here is only financial and I will leave the debate about Iraq to others for now.
The bottom line is that, in the middle of two extremely costly wars, and after the largest tax cut in U.S. history, Dubya did what no other wartime President had ever done in history. "He cut taxes again"!
This second set of tax cuts were, arguably, larger than his historical cuts upon taking office. No other President in history had ever done this before. In fact every other President faced with such challenges, had always raised taxes, or cut benefits, or both, to pay for war. Americans, and indeed all freedom loving nations know that this is a necessary thing to do at such times. Apparently Bush missed that class at Harvard.
That essentially brings us up to today's gigantic and growing, U.S. Debt! Those massive tax cuts, which mostly benefited wealthy Americans, are still taking their toll on the country. Two wars are still going on, and are being paid for with borrowed money from other countries, the largest debt holder being Communist China at approx. 1.6 $Trillion in U.S. Treasury bills. China has made no secret of the fact it is worried about the possible future decline in the U.S. dollar (and thus it's foreign reserves of Treasuries) As of late, they have been on a buying binge of commodities from oil, to potash, ingredients for making steel, plastic etc as it seeks to diversify the stored value of it's reserves. Now China is openly calling for the establishment of an "international currency" based on five national currencies, the dollar, Euro, Pound, Yen and Renmimbi.
Suffice to say this is not going to happen any time soon, but it should give pause (or even shudders) to America and the entire west. By 2050 China's economy will be twice that of the U.S.A. and that has ramifications far beyond just financial. China is still, after all, a communist, totalitarian country and democracy is a pipe dream still.
Now how will all of this affect the Retirefunds of we mere mortals? Since I brought you to here, I'll give it a shot!
1. Taxes will increase in the U.S.A. and this "must" happen soon.
There should be a new gasoline tax of perhaps 10% instituted now, before gas starts to rise again. This will spur investment in green energy.
The tax deduction for housing (mortgage interest deductions) should be capped at $250,000 so as to allow the deduction for basic housing but not for extravagant housing in the millions.
There should be an immediate 2% "goods and services" tax implemented federally on all goods and services sold/purchased in the United States.
There, now that I've fixed some of the deficit problems, how will all this affect our Retirement funds in the meantime?
1. The U.S. dollar will decline in value over the next three years spurring inflation!
2. As this occurs investors will seek better stores of value and the stock market will rise along with commodities, oil, gas, food etc.
3. The U.S. cost of living will increase reducing the standard of living in the USA for many of those who aren't prepared.
4. U.S. Housing prices will decrease, or at least that market will remain stagnant for years to come.
5. The U.S. national defense budget will be reduced.
6. Health care, (medicare, medicaid, etc) will be drastically reformed, or it will be the ball and chain that drags the U.S. economy ever deeper into the abyss.
And remember this my Canadian friends. When the U.S. Sneezes, we always catch a cold. What will happen if the U.S. catches pneumonia? Here's hoping it won't. Here's hoping the the good ole U.S. of A will lead the rest of the world out of this mess that it led us into!